Electric Vehicles: A Cost and Benefit Analysis for Utilities Engaging the Industry

In the past year, the electricity market has witnessed a trend in which electric utility companies are expanding their offerings to customers to include electrical vehicle (EV) industry services, mainly through providing EV charging infrastructures in public and commercial areas. We provide an analysis of the benefits and costs of this engagement and our final thoughts on its feasibility.

Benefits of Utility Engagement in the EV Industry

A few utilities located in the states that are early adopters of EV technology have already initiated active engagement in the EV sector, mainly through installing “level-two” rapid chargers and DC fast chargers located at commercial and public sites. Utilities can benefit from engaging the EV industry in three major ways. First, EV infrastructure deployment can increase electricity sales for utilities and potentially lower the average cost of electricity per kWh for all consumers. The U.S. utility industry is facing lower demand and increasing competition from third-party electricity providers such as solar energy companies. The transitioning of transportation energy from petroleum to electricity via EV deployment provides the utility industry with the potential to tap into the transportation sector, the second largest energy consumer in the US economy. Second, EVs can help balance and smooth grid load as a form of distributed energy storage. Energy stored in EVs during off-peak hours (usually midnight to 7am) can be fed back into the grid during the day when electricity demand is high. With proper rate design, EV deployment can also help reduce peak to non-peak usage ratios through influencing customer behaviors. Third, with smart charging mechanisms, EV interfaces can help utilities to integrate more renewables onto the grid. For instance, chargers can be turned on when extra renewables, such as solar, are feeding into the grid.

Issues Surrounding Utility Engagement in EVs

However, utilities do face certain challenges in actively engaging the EV industry, particularly in obtaining authority to provide charging infrastructure. So far, the three biggest investor-owned utilities in California have all proposed to install public EV chargers, two of which have been approved by the California Public Utility Commission (CPUC). The core debate surrounding utilities’ proposals for providing EV charging stations focuses on which party should bear the costs of the charging equipment installation and maintenance. In the program proposed by Pacific Gas and Electric (PG&E), which CPUC has yet to approve, the utility would recover costs across ratepayer base. As a result, PG&E ratepayers are expected to see an estimated increase of USD 0.70 per month in electricity bills from 2018 to 2022. Opponents of utility EV programs argue that only EV owners directly benefit from charging infrastructure, while costs are often shared by all ratepayers, including those who do not own EVs. Some thereby argue that customers who do not own an EV are in fact subsidizing those who do. It is noted that this criticism is frequently mentioned in utilities engagement in other distributed energy resources, including net-metering in solar PV rooftops where customers with no rooftop solar PVs are sharing the fix costs for those who own a solar energy system.

The subsidization argument is likely to persist and might become a regulatory hurdle for utility companies. Nevertheless, the utility industry is still in the best position to install, maintain, and provide ancillary services for charging facilities, compared with alternative providers, such as government or third-party private companies. First, while EV owners enjoy more direct benefits from accessing charging infrastructure, this does not suggest that other customers will be worse off. As discussed previously, incorporating more EVs into the grid can increase electricity sales, lowering the average cost of electricity per kWh, increase overall grid reliability, and potentially reduce retail electricity prices for all customers. Second, utilities are the undeniable experts in grid infrastructure and management. Utilities are also best informed of grid operational conditions and customer usage in different locations; they can also better respond to grid load changes through pricing design of bidirectional electricity flows to and from EVs and other distributed energy resources.

Another frequently mentioned concern regarding the integration of EVs with the grid is the potential impact on grid stability, and the stability for transmission and distribution. Based on several industry reports, the actual impact on the grid from EVs is said to be marginal. The current electric grid in the US is able to handle the increased capacity from EVs in the medium term, with little infrastructure maintenance directly attributable to EVs. Nevertheless, integration of EVs does go hand in hand with implementation of broader smart grid technologies. In addition, some reports have identified that the grid might face capacity pressure unless more EVs are connected.

Should Utilities Enter the EV Industry?

The simple answer is that electric utility companies should support deployment of EV infrastructure. The benefits of engaging the EV industry surpass the marginal costs of providing the associated additional grid services. Utilities can utilize three major business strategies to better enter the EV market and minimize some of the potential negative impacts.

First, utilities can consider establishing special time-of-use rates for EV owners to encourage EV charging in off-peak hours, such as a discounted off-peak electricity prices (usually between midnight and 7am) paired with a daytime price hike. This rate structure design can discourage EV owners from overtaxing the grid during peak hours and generate higher electricity sales in off-peak hours. A similar rate structure has already been adopted in many states and has proven to be effective in shifting behavior for EV-charging times. Second, utilities should continue promoting smart meter deployments for consumers. Smart meters will allow utilities to send out day-ahead pricing signals to EV owners. The installation of smart meters is also the prerequisite for adopting more advanced grid management technologies such as Vehicle-to-Grid (V2G), which allows dual-directional communication between EVs and power grids. V2G also helps utilities better manage electricity flows to and from EVs. Third, utilities might consider investing in digital platforms and smart-metering consumer applications to provide instant pricing signals to customers. The utility industry is experiencing a trend in which customers are demanding more customized information and services through mobile devices and other digital platforms. A smart-metering application can also help utilities to better communicate greenhouse gas emissions reductions and energy savings to customers.

The US government has implemented some regulations and economic incentives to promote EV technology adoption including the CAFE standards, EV subsidies and tax incentives, as well as government R&D investment. However, policies and regulations directly targeting utilities’ engagement in the EV industry are falling behind broader industry development. A few of the largest utilities in California have actively advocated for regulatory authorization in providing public charging facilities. Programs for installing EV charging stations should be planned in phases and first rolled out as pilot activities. As highlighted in CPUC’s pending approval of PG&E’s ambitious charging proposal, regulators are concerned about such programs moving too fast. Pilot programs can address regulators’ concerns and provide insights for installing chargers in larger scales in the future. In conclusion, there is little doubt that the EV industry provides great potential for electric utilities. We expect to see utilities rapidly expanding their activities in the EV industry in the near future.

Molly Wang is an energy finance analyst for Sustainable Capital Advisors. She is currently an MA candidate at John Hopkins School of Advanced International Studies in international economics, energy, resources and environment.